Orient Securities released a research report stating that it expects nd paper (02689) to achieve net income for the parent company of 0.99/1.656/2.03 billion yuan for FY2025-2027, with BPS of 9.84/10.19/10.62 yuan, corresponding roe levels of 2.1%/3.5%/4.1%, a target price of 4.26 HKD, and a "buy" rating. Recently, the supply-demand relationship in the box board corrugated paper industry has improved, and prosperity is expected to recover. The company has outstanding production capacity advantages and a complete upstream raw material layout, reducing costs through self-owned power plants and terminals, while optimizing product structure in pulp production capacity, deepening cost advantages.

Orient Securities' main points are as follows:

The industry's ups and downs for over thirty years, the leading packaging paper company expects a breakthrough after a period of accumulation.

The company entered the packaging paperboard industry in china in 1998. After nearly 30 years of rapid growth, it has now become the largest packaging paper manufacturer in asia. By mid-2024, the company has established a papermaking capacity of 21.67 million tons and over 5 million tons of pulp production capacity. In FY2024, the company's revenue reached 59.496 billion yuan, benefiting from the continuous expansion of production capacity both domestically and internationally, with a compound annual growth rate of revenue of 7% over the past ten years. In FY2024, the company achieved a net income of 0.751 billion yuan for the parent company, with profit turning positive year-on-year.

The pace of expansion in the box board corrugated paper sector is slowing, and the improvement in supply and demand is expected to drive a recovery in prosperity.

Since 2022, the box board corrugated paper industry has entered a downward cycle, with a one-way decline in prices of raw materials such as recycled paper and base paper. Analyzing from a supply-demand perspective: ① On the supply side, the industry entered a phase of intensive capacity investment in 2022, with an annual capacity increase rate of 5%-10% domestically; at the same time, the import tariff on box board corrugated paper was reduced to 0%, resulting in a considerable amount of box board paper production capacity from Southeast Asia being imported into the chinese market, further increasing the actual domestic supply. ② On the demand side, the demand for box board corrugated paper is closely related to end consumer consumption. The terminal demand was weak in 2022, and although there was some recovery in demand in 2023, it could not offset the earlier supply increase, leading to a deterioration in supply and demand and a decline in paper prices. Looking ahead, it is believed that the growth rate of new supply in the industry will significantly decline over the next three years. On one hand, the pace of expansion will slow, and on the other hand, the increase in import volume has become quite limited; the steady growth in demand will gradually digest the previously excessive production capacity, and the improvement in the supply-demand relationship is expected to gradually repair the overall prosperity of the industry.

The scale advantage in base paper production capacity is prominent, and the layout of upstream raw materials is increasingly complete.

The company currently has 10 domestic production bases and 3 overseas production bases, and its capacity layout has basically covered all major domestic markets. Most bases are equipped with self-owned power plants, and some important bases in core markets are equipped with terminals, effectively reducing energy and transportation costs, showcasing its scale advantages. At the same time, after the official implementation of the waste ban, the company is actively laying out pulp production capacity, optimizing its product structure, and continuously enhancing its ability to acquire wood chip resources (such as placing pulp production capacity near guangxi province, where forest resources are relatively rich, and equipping it with self-owned wood chip ships), deepening the cost advantages of self-produced pulp.

Risk warning

Risks of slowing macroeconomic growth and the recovery of end demand not meeting expectations; risks of the company's pulp and paper new projects not advancing as expected; risks of intensified industry competition.